TMFPostOfTheDay (< 20)

Markel vs. Berkshire

12

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Markel appears to be trading at 1.05x pro-forma book value after accounting for the Alterra merger. An initial review of Alterra's history leads to some optimism regarding the prospects of the operations to continue providing underwriting profits and, by extension, low or cost free float. Currently, Alterra's investments are exclusively in fixed income. This is going to change when the merger goes through according to Gayner's comments on today's conference call. My interpretation of the data indicates that Gayner would have to reallocate around $1.8 billion of Alterra's investment portfolio from fixed income to equities for the combined Markel/Alterra to have the same percentage of the investment portfolio in equities as the pre-merger Markel. To put this in perspective, Markel's equity portfolio at 9/30/12 was $2.3 billion.

Mr. Market appears to be adjusting Markel's valuation downward to account for the fact that a significant part of the combined entity will be in reinsurance and the reinsurance industry typically struggles to even trade at book value these days. What I think the market is missing is that most reinsurance companies are not active in equities and most certainly don't have someone of Gayner's abilities in charge.

It is interesting to contemplate prospective returns for Berkshire at 1.2x book versus Markel at 1.05x pro-forma book. The new Markel will still be relatively small and have a much longer runway for growth compared to Berkshire. It would not strike me as crazy to reallocate capital from Berkshire to Markel at current valuations. In doing so, one would have to sacrifice selling something that is demonstrably cheap and diversified with a promising future for something that is demonstrably cheap, not as diversified, and may have an even more promising future. It's definitely an intriguing subject to think about.